Consultations available by video and phone with electronic signatures.

Budgeting to reduce debt

Using a Budget to Reduce Your Debt

Paying off debt is difficult, especially if you’re faced with a large amount of debt or debt that has very high interest rates, such as credit card debt. With such debts, if you’re only able to make small payments each month, it will take you a very long time to eliminate your debt, and it will cost you a lot of money to do so as well.

If you’re having trouble reducing your debt, it might be because you don’t have a plan for how you will eliminate it. You could be making your payments each month but not really making a dent in your actual debt. Making the minimum payment every month will keep your creditors happy, but it will cost you a lot of money and drastically increase the time it takes you to pay off your debt.

Having a budget and making a plan can help. Here are some tips and reasons why.

Making a Budget that Works

Everyone should have a budget, no matter how much you earn, how much you spend, or how much debt you may have. If you don’t have a budget, sit down and make one. The first step is to know exactly how much you earn. Look at your paystubs or your bank account to determine what you earn each month and only consider money that you can count on receiving. For instance, bonuses and tips may not be something you know you will receive each month, so it’s better to try to create a budget without them.

Once you know how much you’ll earn, it’s time to add up how much you spend. For this, you may wish to break down your spending into three categories: Fixed costs, variable spending, and debt repayment. Fixed costs are items that you need to pay for each month and that you can’t really change very much. For example, your rent or your mortgage payments will be considered fixed costs. Variable spending is everything else that you can at least somewhat influence. For example, everyone needs to spend money on food and transportation, but you have some control over how much you spend.

Budgeting for variable costs can be difficult if you don’t know how much these expenses cost you each month. Look back through your old credit card and bank statements to help you figure out how much you’re spending on food, clothing, entertainment, transportation, etc. You may want to track your spending for a while so you can get accurate numbers for these categories.

Then write down how much you owe in debt repayment and when you need to make these payments. Your goal is to fit all of your fixed, variable, and debt repayment costs into your income without going into debt. If you can’t afford everything, you’ll need to make cuts.

Remember to Save for Emergencies

It’s critical to factor emergency savings into your budget. Sudden, unexpected costs (like a big car repair, for instance) can hurt your financial situation if you don’t have any emergency savings, causing you to need to take on more debt. Make sure you’re putting aside at least some money each month for emergencies.

Avoiding Overspending

One important way that a budget helps you pay down debt is because it can help you avoid overspending. Once you’ve created a budget, stick to it and don’t spend more than you’ve allocated yourself. Tracking each of your purchases and comparing what you’re spending to your budget can make it easier to live within your means.

Paying Down Debt Faster

Once you have a budget that works for you, you may want to turn your focus towards paying off your debt more quickly. Most creditors will allow you to increase your payments to pay off your debt faster (check with them if you’re not sure). Credit card debt will likely be one of your main priorities as this debt often comes with high interest charges. The sooner you can pay off your credit card debt, the more financially stable you’ll be.

Look at your budget and see where you can make cuts that will allow you to pay off your debt more quickly. Any dollar you don’t spend on entertainment or eating out (for instance) can be put towards paying off your debt.